Cost Accounting Evaluation - Assignment Example

Accounting Name University 1. What are the main differences between a financial report audit, an environmental audit and an efficiency audit? Financial report audit Is the audit of financial statements of a legal entity with the entity of expressing an audit opinion, the audit opinion provides a reasonable assurance, but not a complete assurance that the financial statements are presented fairly in all material aspects, and give a true and fair opinion about the financial position of the company for the period under review(S Mullainathan, 2012) The objective of the auditing the financial statement is to allowing the auditor express an opinion or judgement on them, as to whether the financial statements, are prepared in all material aspects according to the financial reporting framework applicable. Environmental Auditing An environmental auditing environmental audit is a broad term that is used to reflect the various types of evaluations that are intended recognize environmental compliance and the gaps that exist in management system implementation, along the associated corrective actions(Lawrence B. Cahill, 2010). The vital purpose of environmental audit is to provide a comprehensive and systematic environmental evaluation of the performance of the organisations operations in relation to the environment. Efficiency audit Efficiency audit is also known as performance audit this is the examination of the activities of a company in order to ascertain if the resources are being utilized in due respect of the economy efficacy and effectiveness and accountability requirements are being followed. There are two types of efficiency audits the management compliance audits and management information system audits(Wil van der Aalst, 2012). 2. What is the difference between reasonable assurance and limited assurance? Reasonable assurance Reasonable assurance is described as the level of confidence that an auditor in exercising his due professional diligence finds statements of financial position of an organisation are not materially misstated, or is expected to attain from carrying out the audit. It is a great but then again not absolute level of assurance. Absolute assurance The highest level of assurance that an auditor can give is the absolute assurance if the auditor analyses each and every transaction, therefore, this high level of assurance can only be given if the auditor does not conduct sampling(Bode, 2008). Because of the time and cost involved during auditing, it is not possible for the auditor to examine all the material transaction documents of the organisation. There are various reasons why assurance can never be absolute and they include the following; 1. Because testing is involved in the auditing process. 2. Because the accounting information systems that the auditor places reliance on places a certain degree of dependence and also intrinsic system limitations. 3. Because most audit is persuasive and not definitive. 4. Auditors do not test all the items under investigation. 5. Most matters under examination by the auditor may be estimates and not absolute figures. Why would Chip ask that Ron have the financial report for McLellan's Shoes audited rather than reviewed? The Auditing of the financial statement provides a trusted and verified second opinion as to the financial position of the organisation. Auditing the financial statements will verify whether it has been prepared in compliance with the financial reporting standards and accordance with the financial statements regulatory framework. An auditor will provide a true and fair view of the financial position of the company. Auditing will verify whether material misstatements exists in the financial statements. Auditing will checks whether material errors and fraud exist in the preparation of the financial statements(Bode, 2008). In the occasion Ron would want to seek for financing or loan, audited financial statements will be required. In the case, of taxation audited financial statements provided and true and clear picture of the financial position of the enterprise for the period under review. There also other by products of auditing, the like examining whether the financial information system exists and whether they work in practice. Auditing also verify whether the internal control system that safeguards against fraud and material errors is working as intended. In the cases of investigation from regulatory agencies, audited accounts provide the material evidence against the financial position and the operations of the firm(Wil van der Aalst, 2012). Auditing also examines the company’s level of risk and the mitigation measures that are available. The reviewing of the financial statement is the determination of factors that may undermine the company’s efforts. In reviewing a person would be examining the company’s economic position, in reviewing the economic status of the company the following aspects of the financial status will be examined and, they include; liquidity, risk management, and profitability. The review of the financial enables the owners and other experts review how the management of the organisation comes up with its operating plans(Adelopo, 2013). The review of the financial statements ids done by financial analysts, lenders, suppliers, regulatory agencies, investors and other interested parties. The review of the financial statements is based on the audited financial statements. Therefore, auditing the financial statements is important than the review of the financial statements. The review of the financial statements precedes auditing. What factors should Ron consider when selecting an accounting firm to complete the McLellan's Shoes audit? The factors to consider when selecting the appropriate auditing firm to carry out audit includes the following; a. The level of skill and professionalism of the auditor; an external auditor should have attained the relevant qualification standards at stipulated by the professional body. b. The level of experience; the level of experience of auditing would enable the auditor provide the necessary skill and technical ability to carry out research to the required standards. c. The auditing fees; the auditing fees are material matter to consider, is the auditing fees affordable or expensive, can McLellans afford to pay the auditor. Availability; the residence of the auditor is vital in carrying out the out, an auditor who is not readily available might not carry out the audit with the required due skill and professionalism. d. Personal connection; personal connection can stifle the objectivity of the audit, an auditor should not have a personal relationship with the client the relationships should be limited to professionalism(Lawrence B. Cahill, 2010). e. Familiarity; the level of familiarity of McLellans business operations is vital in deciding the choice of an auditor. Familiarity with the operations of the business might reduce the level of professionalism required. This might lead to the auditor missing some transaction and figures in the examination of the financial statements. CASE STUDY 1. Prepare a document that explains the impact, if any, of each piece of relevant information on your client acceptance decision for Cloud 9. The Finance Director of Cloud 9, David Collier, is married to a distant relation of PS Nethercott, a partner in W&S Partners’ consulting department.The auditor client relationship in this case will impair the independence of the auditor. The objective of the auditor is to carry out his audit with professionalism, objective and due diligence and skill and ensure the independence of his professional work engagement is not stifled(Bode, 2008). In this case, the workers professionalism and independence and according to the professional code of conduct of accounting and auditors profession Conduct they should refuse to take up the professional engagement or in the least have another director and his team handle Cloud 9. The consulting department at W&S Partners has tendered for an IT installation project at Cloud 9. The fees from this project, if the tender is successful, would be twice the size of the audit fee. W&S partners are required by their professional code of conduct not to take up any professional engagement with Cloud 9. It is common for audit firms to carry out other non-audit related activities for their clients(Hollis Ashbaugh, 2003). In this cases, the independence of the audit examinations is usually come into question, especially in the case where fees from the non-audit activities is more than that of the audit fees. When the suspiciousness arises the audit criteria and standards of W&S will come into question. The larger the fees of the consulting services will impair the objectivity and professional judgement of the auditor this means that W&S partners are heavily dependent on Cloud 9, therefore, and the auditors’ independence no longer exists. A survey of audit staff at W&S Partners has revealed that 30 per cent have purchased Cloud 9's products (basketball shoes) in the past. The purchase of a client products happens all the time it is the nature of the world. The interaction between the auditors and clients should be kept in reasonable measures so as to ensure that the independence and objectivity of the auditor is not stifled. In this case, 30% of the clients have bought the company’s products, this means that the objectivity and independence of the auditors comes into question, and it cannot be guaranteed(Adelopo, 2013). The real independence of the auditor that is associated with the auditors’ state of mind is stifled, how the auditors will handle themselves in this situation will not be in the in regard with the level of professionalism required. In this case, W&S can either rotate the staff, and give this task to more independent clients or withdraw from the Audit engagement altogether. Four members of the IT department at W&S Partners have shares in retailers that sell Cloud 9's products. In each case, the shareholdings were disclosed on the firm's financial interests register and the size of the shareholding is deemed material under W&S Partners’ ethical guidelines(S Mullainathan, 2012). The four members of the IT department are required to have no working relationship with Cloud 9 at any one time. They should not have any professional engagement with the firm because they might come across material that are material enough to facilitate insider trading in the enterprise. In this case, the Firm, W&S partners are required to withdraw their services completely from any engagement with Cloud 9. An article in a newspaper published in the United States has claimed that Cloud 9 Inc. (Cloud 9's parent company) was secretly running ‘third-world sweat shops’. The article alleged that shoes made by other wholly owned subsidiaries of Cloud 9 Inc. in China and Brazil were using illegal child labour in factories that did not meet local health and safety rules. Cloud 9 Inc. has vehemently disputed the accuracy of the article, suggesting it was planted by a rival company. Cloud 9 Inc. has invited international advocacy groups to visit its factories at any time(Hollis Ashbaugh, 2003). This material will bring the professionalism of W&S in question the auditor are now required to carry out the professionalism and due diligence in order to establish the truth of the matter before they decide to proceed. The action of auditing firms usually come under heavy criticism if they fail to advise the client appropriate, upon the acceptance of the engagement, the reputation of W&S partners will come under heavy criticism from the public if they do not carry out their work in due diligence. If they ascertain that the information is indeed true, W&S should advice Cloud 9 appropriately, in order to avoid any legal liability. 2. List and explain any additional actions you would take before making your client acceptance recommendation to the partner, Jo Wadley, in this case. In this case, a report on the level of independence and due diligence will be prepared to highlight all the material statement before taking this matter with the partner. The partner will then decide on the next appropriate action to take considering the extent at which this matters have gone. All matter concerning the independence and objectivity of the auditing professional services should be adequately investigated and prove provided. 3. Assume the decision is made to accept Cloud 9 as a client. Prepare the client engagement letter. Company: Attention: Address: Post code Town/city: [Town/city, DDMMYYYY Audit Engagement Letter The audit engagement We have been engaged by the general meeting of Cloud 9 to conduct an audit of Cloud 9 We confirm through this letter that we undertake the engagement.The engagement runs for this financial years until the end of the annual general meeting of shareholders to be held in1980. The audit engagement comprises: Examination, in accordance with the Companies Act, of Cloud 9 accountancy and annual report and the management by the board of directors [and the managing director] of the company, which is intended to provide us with evidence supporting our audit report to the general meeting, Other examination and reporting which it is incumbent upon the company’s auditor to perform under the Companies Act (“statutory supplementary engagements”), Assistance and advice which is occasioned by observations made in the course of such examination and other comparable advice (“audit advice”). Terms of engagement Our audit is performed on the basis of the assumption that the management is aware of and understands its responsibility to prepare financial reports that give a fair presentation according to [the Annual Accounts Act or IFRS]. Fees Our fee for examination, in accordance with the Companies Act, of Cloud 9 accountancy and annual report and the management by the board of directors and the managing directorof the company regarding the financial years concerned is calculated as being distributed as follows; Our fee for examination, in accordance with the Companies Act, of Cloud 9 accountancy and annual report and the management by the board of directors and the managing director of the company, concerning the financial years concerned, totalsin accordance with the quotation which has been issued and accepted by you. The Audit Firm wishes to draw to your attention that all calculations of the size of the fee made by the Audit Firm are only estimates which are based on the following assumptions. That the scope, orientation and organisation of the business are essentially stable and unchanged in comparison with the previous year. That the management of the company is carried out in a manner compatible with applicable association law and, where applicable, statutes or equivalent provisions. That systems of significance to accounting are appropriate, function well and are unchanged throughout the financial year. That the current accounts are of good standard and that there is satisfactory internal control throughout the financial year. That controls in essential accountancy systems have been documented. That annual and interim financial statements are prepared, reconciled, complete and well-documented and also analysed by the company before examination of these begins. That the company supplies financial statements, the annual report and other material for examination in good time before the auditor according to the schedule stated in the engagement letter or other agreement. That the company and its representatives are available to assist us [me] with necessary information. That no essential or extensive changes occur in the rules which are applicable to the activity of the company or execution of the audit engagement. Any other services in addition to audit The audit engagement does not cover advice other than audit advice as stated above. For such services, for example tax return assistance, tax advice and other “freestanding advice”, FAR’s General Terms for Advisory Services, apply, unless a special engagement document/agreement has been prepared. Confirmation Please contact the undersigned if you have any questions concerning the contents of this engagement letter. We request that you sign this engagement letter, which has been drawn up in two copies, to show that you confirm and consent to this agreement. We wish in particular to draw your attention to the description in the General Terms of the responsibilities of the management and the auditor in the audit engagement. Please return a copy of the engagement letter to [Name]. Yours sincerely [Audit Firm] Auditor Signature Title Name in block capitals Date Reference Adelopo, I. (2013). Auditor Independence: Auditing, Corporate Governance and Market Confidence. Aldershot, United Kingdom: Gower Publishing, Ltd. Bode, S. (2008). Auditor Independence and Regulation. Munich, Germany: GRIN Verlag. Hollis Ashbaugh, R. L. (2003). Do Nonaudit Services Compromise Auditor Independence? Further Evidence. The Accounting Review, 611-639. Lawrence B. Cahill, R. W. (2010). Environmental Health and Safety Audits. Exton, Pennsylvania: Government Institutes. S Mullainathan, M. N. (2012). The market for financial advice: An audit study. Massachusetts, MA: National Bureau of Economic Research. Wil van der Aalst, A. A. (2012). Replaying history on process models for conformance checking and performance analysis. Data Mining and Knowledge Discovery, 182–192. Read More